The Government has annouced they are to follow the Oppositions, by cutting Inheritance Tax thresholds. We look at further ways to reduce your bill...

*(All information correct at time of writing (09.10.07). For more advice and information on latest developments as they arise email us at legal@preuveneers.net)

1. Update your Will
Inheritance tax is not due when an Estate passes from husband to wife or vice versa. However, if you want as much as possible to wind up in the hands of your children and grandchildren, you need to ensure both spouses make use of their individual nil-rate band. Married couples and those in civil partnerships can use nil-rated discretionary Will Trusts to make IHT allowances.

For example: Mr & Mrs Jones have a house valued at £600,000. If Mr Jones were to die, his wife will have no IHT to pay as transfers between spouses are tax free. However when Mrs Jones dies, her Estate will be taxed at 40% on assets above £300,000; which amounts to a bill of £120,000.* Correct at time of writing

A Will Trust, however, uses both the husband and wife's nil rate bands so that entire £600,000 property is free from tax.

2. Gift Assets Away
Gifting is one of the easiest ways to reduce your IHT bill. Each year you can give away £3,000 free of inheritance tax or £6,000 if you did not make a Gift of this kind in the previous tax year. A married couple giving for the first time could therefore hand over £12,000 to their children in one year. After that the maximum for a couple is £6,000.

You can also legitimately avoid IHT by giving £250 to any number of people every year, but you cannot combine it with the above exemption. Parents can give £5,000 to each of their children as a wedding or civil partnership Gift. Grandparents can give £2,500 and anyone else £1,000. Gifts of any size to political parties and charities are tax free.

3. Live for 7 Years
It is possible to make further tax free Gifts - Potentially Exempt Transfers - but you have to survive for 7 years after making the Gift. Always make a note of such gifts to pass on to your Executor, as the Revenue will be paying closer attention in future. If you die within 7 years and Gifts are valued at more than £300,000, the tax reduces on a sliding scale if made between 3 and 7 years before the death.

4. Consider a Loan Scheme if you want to Keep Control
Loan Trusts are designed for people who cannot give away their assets as they need to live off the income but want future investment growth to be IHT free.

You make a payment to a Trust which is treated as an interest-free loan to the Trustee. The Trust then repays your loan capital outstanding which may be subject to tax but all investment growth is free from tax. The underlying investments for these schemes are generally insurance bonds that are paid with the basic rate of tax already deducted.

If you died before you had withdrawn all the original capital, any outstanding loan would form part of your Estate and be liable for tax. You can set up most schemes using a bare Trust, where the beneficiaries are fixed and become entitled to the assets at the age of 18. If you want the Trustees to retain greater control, you can also set up a flexible Trust, but there could be a 6% tax charge every 10 years on assets over £300,000.

5. Try Gift Trusts
If you need to draw an income but do not think you will need the capital, look at discounted gift Trusts. You make a gift into a single premium insurance bond for your children, fixing how much income you will draw until your death. If you survive for 7 years, the bond does not count as part of your Estate. Even if you die within the 7 years, your heirs may get a discount because your right to draw an income from the gift reduces its value. The extent of the reduction depends on your health, gender, level of income and age. The older you are when you take out a scheme the smaller the discount.

6. Take "AIM"
As you get older many of the options for avoiding IHT disappear. But one way that is proving popular with the over 70’s is to buy shares quoted on Alternative Investment Market (AIM).

Most AIM shares become free from inheritance tax when you have held them for two years because they qualify for 'Business Property' relief. It is not for the faint-hearted, though, because AIM stocks can be very volatile. However, the value of your portfolio would have to fall by 40% or more before you would lose the IHT benefits. This is not inconceivable, but advisers say many clients are prepared to take a risk. Shares in businesses that engage in "substantial" non-trading activities, such as property, finance and mining, are not generally eligible. About a dozen fund managers and stockbrokers will select a portfolio for you. The minimum investment ranges from £30,000 to £100,000. Collins Stewart, one of the cheapest, charges an entry fee of 3% and an annual charge of 1.5% on top of dealing costs.

7. Borrow More Money
If it is simply the value of your home that is pushing you into the IHT net, an equity release loan might help. There are two main types.

A home reversion plan enables you to sell part of your property in exchange for a one-off lump sum, which you can give away, or a regular income. With this type of scheme you know exactly how much your heirs will get. The alternative is a lifetime mortgage or roll-up scheme, whereby you take out a mortgage on part of the value of your home, usually in return for a cash lump sum. Interest is "rolled up" and the loan is repaid only when you die or when the houses sold. The amount you owe can therefore grow quickly and swallow up your his inheritance.

8. Take Action even after Death
A deed of variation allow you to change ownership of the house you live in after your spouse's death so your heirs have less IHT to pay when you die. If a portion of the home is transferred into a discretionary Trust, when you die assets held in the Trust do not count towards your Estate.

9 . Buy a Forest
Money invested in a commercial forest becomes free of IHT after you have owned it for two years as it qualifies for business property relief. Commercial woodlands are defined as property where timber from the forest will be actively marketed and sold. Most plots will set you back £100,000 or more. Larger plot can top £1 million.

10. Become a Farmer
Families can escape IHT by purchasing actively farmed land. If you farm the land yourself, you will qualify for 100% relief on the land after two years. The same is true if you sign a contract with a farmer to do the work for you, as long you share in the profits and losses. However, if you let the land to a farmer, you qualify for relief only after 7 years.

To speak to an expert regarding your IHT arrangements, email legal@preuveneers.net or call 020 8646 4885